Imagine a banker in 2013, trying to see into the future.
Visionary banker: "I see the future. There is no money in the future. It is electronic payments."
Customer: "You're freaking me out, man."
Visionary banker: "We need to build a platform for the electronic payments. The electronic payments are coming. They will call it... crypto."
Customer: "I'm taking my money out of here! Put on a suit, man. Open your eyes."
Visionary banker: "I have read the white paper. It is Bitcoin, they will call it Bitcoin. Or possibly, Ethereum or Solana."
You can get rich when visionaries are right
Silvergate Capital (SI) has visionary management. I don't mean that as an insult or a joke. Back in 2013, management had a hunch that crypto was going to amount to something. And so, back in 2013, the bank decided it was going to pursue the leaders in the crypto industry and try to get them as customers of the bank.
None of the other banks were doing this. It was outside-the-box thinking. So Silvergate pursued (and got) most of the crypto trading exchanges as clients of the bank way back when. And the bankers at Silvergate did this by solving a pain point the exchanges were having. Crypto trades 24/7, but the banking system doesn't. So Silvergate spent some money and built a trading network for crypto, called the Silvergate Exchange Network (SEN). And that's the way dollars in a crypto trade change hands.
Crypto investors have made a lot of money investing in this new asset class.
Bitcoin has been a monster investment, even with this year's retreat. It's been a nice 30-bagger for early investors, and for the visionaries who saw what it might become. And you might be shocked, but Bitcoin isn't even the best. Ethereum has gone up in value 45,000% since its 2015 debut.
The big banks missed out
Jamie Dimon, the chief executive officer of JPMorgan Chase, has strong opinions about crypto. "I personally think that bitcoin is worthless," Dimon said during an Institute of International Finance event on Monday, CNBC Pro reported.
"I don't want to be a spokesperson -- I don't care. It makes no difference to me," Dimon said. "Our clients are adults. They disagree. That's what makes markets. So, if they want to have access to buy yourself bitcoin, we can't custody it but we can give them legitimate, as clean as possible, access."
Now this is huge for Silvergate. Listen to what Dimon is saying ("we can't custody it"). The bank has all these customers who want to invest in crypto, and the bank can't serve them. But the demand is there. So JPMorgan and other big banks are now opening up accounts at trading exchanges like Coinbase, because a trading exchange can perform custodial tasks.
Meanwhile, Silvergate was top dog and first mover in providing banking services to the crypto industry. And this made the tiny bank extremely profitable. Its revenues are spiking higher. Silvergate has shut down its traditional bank and is almost 100% focused on bringing big banks, investment fund managers, and all the other late money to the crypto universe.
Silvergate is a tech stock masquerading as a bank
Unlike the financial industry, the tech industry loves visionaries. One of the things that have made crypto valuations spike a lot higher is that the tech industry has really jumped on board. Block trades crypto. PayPal trades crypto, too. Block and PayPal are two fintech (financial technology) superstars that have done really well over the last several years.
It is not actually absurd to notice that dollars are disappearing from use, to be replaced with debit cards. I have days when I have no cash in my wallet. I don't need cash. I only get cash when I want cash. The vision that cash will be replaced with electronic payments is pretty obvious now.
What that means is that dollars will become electronic payments, too. So, yes, we will need financial networks that can send electronic payments around the world. This is why I think Silvergate's CEO Alan Lane was right on the money with his vision back in 2013.
The future is huge when visionaries are right
Silvergate is still a small bank, with a $2.3 billion market cap. But large banks and institutions are lining up to open accounts at the bank, so they can start trading crypto for their banking clients. Silvergate keeps the dollars in its trading accounts, and the bank makes a lot of money from interest payments. Silvergate has 45% profit margins, and 88% revenue growth.
It's still a tiny stock. But so far management has been very successful at spotting future trends and pursuing them. I think the internet revolution will ultimately transform the financial industry. And Silvergate Capital is in the sweet spot as more and more banks want to offer crypto trading services for their own clients.